Tame gas demand may keep retail prices in check

Commentary: $3 gas at the pump may be inevitable, say analysts

TOKYO (MarketWatch) -- U.S. gasoline prices probably aren't headed for a "super spike" at the pump this year as growth in domestic demand for the fuel fails to impress, but consumers can expect to pay at least $3 per gallon with prices already up nearly 50% from a year ago.

"We will probably see $3/gallon for a national average sometime this year but barring significant unrest in the Middle East, it's highly unlikely that we will see a super spike in retail gasoline prices that we witnessed in 2008," said Troy Green, national spokesman for motorist group AAA.

In July 2008, retail prices reached a record average level of $4.114 to log a more than 35% jump from a year earlier, data from the Oil Price Information Service shows.

As they are, "most analysts have been surprised at the [strength in] prices of crude oil and retail gasoline," Green said.

Many analysts consider the levels to be too high even though gas prices are currently at a much-less lofty level of around $2.70 per gallon at the pump and crude oil's trading below $80, down from an all-time futures high of almost $150 in 2008.

Investors have been piling into the commodities sector as the U.S. economy shows signs of life. "A tremendous amount of money is flowing into the commodities markets as investors are feeling confident that the U.S. economy will improve significantly in the spring and summer months," Green said.

Of course, "when looking at multiple indicators, our economy has a long way to go before it's given a clean bill of health," he said.

So "certainly, traditional supply and demand fundamentals were not the focal point of oil prices for much of 2009 and into the first several weeks of 2010," he said.

Oil's contribution

Prices for gasoline are already considered lofty on a historical basis for this time of year.

On Thursday, prices averaged $2.733 per gallon, down more than 30% from the record peak, but up from $1.848 a year ago-- and prices have climbed around 6% in a month, according to AAA's Daily Fuel Gauge Report.

Retail prices are around 50% higher than a year ago because crude prices have about doubled from one year ago to trade around $80 per barrel, Green explained.

And crude is now trading around the $80-per-barrel level because the domestic economy began to stabilize towards the end of 2009 "after being on life support a year ago," he said, pointing out that prices for oil stood at about $40 at the same time last year.

As of the week ended Jan. 15, refinery utilization stood at 78.4% of capacity, a sizable decline from a five-year average level of close to 89%, government data showed.

So it's not really surprising to hear that the U.S. Energy Information Administration expects increases in retail gas prices to an average of $2.84 in 2010 and $2.96 in 2011, from $2.35 in 2009.

Liquid fuels consumption declined by 4.2% in 2009, to mark a second-consecutive annual decline, according to the EIA's short-term energy outlook report issued in mid-January.

Of that, however, motor gasoline was the only major petroleum product whose consumption did not decline, though it logged a "scant" increase of 0.1%, the report said.

The EIA expects the world economy to continue to recover in 2010 and 2011, contributing to global oil demand growth of 1.1 million barrels per day this year and growth of 1.5 million barrels per day next year.

And given that, it also forecasts that a motor gasoline consumption climb of 0.6% this year will contribute to total petroleum products consumption increase of 1.1%.

Demand fails to impress

In the bigger picture, however, demand for oil and oil products isn't very impressive and in the long run, that may help keep prices for those commodities from running rampant.

Tom Kloza, chief oil analyst at the Oil Price Information Service said he doesn't expect consumers to see a record-setting downhill spiral in oil prices this year, but "it will be hard for current numbers to be sustained as skeleton-like demand takes a luge run."

And since higher costs for oil contribute to increases in prices for gasoline, the fuel's likely to continue to mimic oil's direction going forward.

"We've actually seen retail fuel prices ease slightly from their fifteen-month highs in the last few days," Kloza said earlier this week.

Motor gasoline demand has averaged 8.8 million barrels per day over the last four weeks, down 0.2% from the same time a year ago, EIA data as of the week ended Jan. 15 shows.

Motorists are spending about $1.008 billion on gasoline -- less than the $1.07 billion they were spending on Christmas Day, according to Kloza.

"January often brings plenty of oddity to the electronic circus of circuitry known as futures trading, and January 2010 lived up to that tradition in spades," he said. "Most of the people who deal in the actual physical petroleum universe view current numbers as bubbly," while many investment houses tend to think otherwise.

On the New York Mercantile Exchange, reformulated gasoline futures for March delivery are trading around $2 per gallon, down from a high of around $3.40 in July 2008, though up over 70% from a low of $1.15 in December 2008.

But there's no denying that demand has weakened recently.

"Motorists tend to do less driving when there's ice and snow, and holiday bills on kitchen counters and empty merchant parking lots on weekdays," said Kloza. "Underemployment levels of greater than 17% also have altered behavior."

Demand for gasoline during Christmas week was 9.07 million barrels -- or just shy of 381 million gallons per day -- while demand during the first half of January, as measured by the EIA, has been "stuck" at 8.74 million barrels, or about 367 million gallons per day, he said.

As a result, prices have generally been falling since climbing to $2.758 per gallon on Jan. 14.

"We'll see larger pullbacks in the days and weeks ahead," Kloza said, adding that with the occasional exception, one can count on poor demand for transportation fuels in January and February.

Myra
P. Saefong

Myra Saefong is a MarketWatch reporter based in San Francisco. Follow her on Twitter @MktwSaefong.

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